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Comment & analysis / Comment Print article | Email
A duet to mend markets and heal rifts
Published: November 6 2003 22:55 | Last Updated: November 6 2003 22:55

The US and the European Union account for the majority of transactions in the international capital markets, giving multinational companies access to capital at lower costs than in any one market. Yet, despite intensive discussions, significant regulatory differences remain between the US and EU capital markets.

To help reconcile these differences, we suggest applying the concept of G2 leadership - advocated here  on October 6 by Fred Bergsten and Caio Koch-Weser - under which top US and EU officials would operate an informal steering committee to manage critical issues for the international economy. Six specific concerns - three raised by the EU and three by the US - could be resolved promptly.

First, global accounting standards. To list on a US market, EU companies must reconcile their financial statements with US generally accepted accounting principles (GAAP). By 2005, however, EU companies must make their financial statements conform to international accounting standards (IAS). Complying with two different sets of standards will impose substantial expense and delay on EU companies seeking to list on both sides of the Atlantic. The G2 could provide strong support to the efforts of various private and public groups to harmonise US GAAP and IAS.

Second, the Sarbanes-Oxley Corporate Reform Act applies to all foreign companies whose securities are listed for trading in the US. Despite efforts by the Securities and Exchange Commission to recognise foreign governance practices, many EU companies still view the Act as problematic. Most important, it establishes stringent new requirements for chief executives and chief financial officers to certify the financial controls of a US-listed EU company and forces the company's foreign auditor to register with a US board. Through the G2, top government officials could push for further compromise in applying the Act to US-listed EU companies.

Another problem area is the prohibition on European exchanges directly offering their trading screens to US investors without registering as a US exchange. The SEC is focused on protecting US investors from loosely regulated foreign exchanges and foreign companies that are less transparent than their US counterparts. But the G2 could negotiate a limited waiver from the SEC, allowing EU exchanges that met certain regulatory qualifications to place trading screens directly with all US investors, or at least US institutions.

The transatlantic relationship desperately needs a fresh conceptual foundation, write Fred Bergsten in Washington and Caio Koch-Weser in Berlin
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Fourth, access to pension management is currently subject to rules imposed by national regulators in the EU. These rules in effect raise entry barriers for EU and US global asset managers skilled in running defined-contribution plans. The EU's new pension directive sets minimum standards, though it does allow some national flexibility. The G2 could prod EU countries to implement the directive in a manner that minimises quantitative restrictions on pension investments, while giving all types of financial firms the opportunity to pitch for local pension business.

Fifth, the adoption of uniform takeover rules in the EU could help create a genuine European market for capital control, increasing European efficiency and productivity. The EU has not reached a consensus on uniform rules for takeover defences despite the rise in cross-border takeover bids. The G2 could help push for uniform rules, partly by comparing EU and US practices.

Last, the EU and US could smooth out differences on the EU directive on financial conglomerates.

This proposal could be interpreted as requiring non-bank financial companies with significant global operations to ring-fence their European operations for the purpose of consolidated supervision.

Such an interpretation would impose substantial costs on such companies and put them at a significant disadvantage relative to banks. The EU could recognise that the SEC provides supervision of non-bank financial companies equivalent to that provided by bank regulators. The G2 could help secure a solution along these lines.

Not only would a G2 resolution of these six issues help enhance international capital markets; it could also assist in rebuilding the historic foundation of the transatlantic alliance.

Robert Pozen is the former vice- chairman of Fidelity Investments. Mario Draghi is vice-chairman of Goldman Sachs International

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